Monday, January 30, 2012

The “German Solution” trial balloon floated Friday was so leaden that one might think that it was designed to prompt the response over the weekend that it did receive from Greece. That it was a memo of an “agent provocateur” to harden positions and reduce the ability of reasonable folks to find remedy by inciting passion. That it was crafted to start Greece towards leaving, on their volition, the EZ.

There is the seeds of a solution in this event, though.

As a crisis of a treaty, a currency board or confederacy – then there is not much positive in this event.

But if the current crisis is perceived correctly as a constitutional crisis then all issues become matters of law precedent and all points become something to use in negotiating a constitutional remedy.

The Greeks should grab hold of that part of the memo which is to their, and the entire EZ, benefit – that an authority could have seniority over Greek governance. Embrace and accept that idea and then broaden it to one of equality and uniformity for all the EZ. The idea of such seniority under a European Commissioner should be accepted by Greece provided the following conditions are met:

1. That the European entity, the commission, be broadened to 17 members.

2.That one member for the commission be popularly elected from each EZ country.

3.That the commission be called the European Financial Office

4.That all EZ countries subscribe to oversight from this EFO, in the same manner

5.That the EFO be mandated via a referendum held at the same time for each 17 member countries

6.The EFO supersedes the EP, the EC and the existing commissioners.

Before the EFO is institutionalized, 60% of all existing EZ sovereign debt is retired at par via conversion, with the ECB acting as fiscal agent for the EFO, and debt equal in value to par amount of converted debt be issued in the name of the EFO which will be full faith and credit of the EZ. That only this debt will be presented to the ECB discount window for monetary operations and be the primary asset held by the ECB to effect all monetary operations.

After conversion, the existing debt for the nation members and all subsequent debt will be solely the credit of the nation’s specifically and will not be allowed to be presented to the ECB or the EACB system for discounting. This debt will not be susceptible to any opinion or ruling from any EU or EZ entity or authority such as the ECB.

The EFO with the ECB acting as the sole fiscal agent, will be able to issue or retire debt at will

All members of the EFO will be elected for 7 years with the election for the office held in each member country with franchisement to vote for all residents of that country irrespective of their birth origin, upon the same day.

At the request of all EU entities, the EFO will consider the funding of any general expense of the EU entities – provided the expense is solely for the benefit of the EZ area. But only the EFO may authorize such expenditures and can cancel or renew such requests at will.

Every member country will, upon the determination of the EFO, make available up to 60% of all tax revenue raised at the national level to the EFO. The EFO will be the sole entity which will determine the use of those funds. The EFO will have no right nor be able to seek any taxation or revenues found at the municipal or provincial levels of organization. But for the costs to administer and adjudicate such services, the EFO will have all revenues generated from customs and tariffs or passport or travel fees within but between EZ areas or to and from the EZ area entire. The EFO will have the budgetary oversight over all organizations which police, administer, and implement law in regards to customs and immigration.

The EFO will provide an annual report to the EP disclosing all finances and current position of debt and revenue. Furthermore, the EFO will present, nominating three EFO members to do so, to the EMP on a quarterly annual basis.

All disputes which an EZ member may table towards or with the EFO will be adjudicated by the European Court of Justice which the decisions will be final. It may very well require a special ECJ which is built upon justices with proven residency in only the EZ member states – a “European Court of Budget and Taxation”.

A customs, tariff, excise and taxation police capability will form which will report and be administered by the EFO.

With the above and using the near unworkable German Proposal of this weekend, the Greeks could reverberate back throughout the EZ the usable principals in the proposal to establish remedy.

Thursday, January 26, 2012

Whether they like it or not, the USA is the most accomplished and successful entity in history in addressing and managing the problems Europe is now facing. Of course incredible trial, terrible error and often crass outcomes have occurred to the USA during the last two centuries to acquire this knowledge. Much pain and death from the twin poles - forever connected in American history - of racism and slavery versus minority institutional rights, in defining the interplay between the freedom of institutions and the freedom of the individual - occurred as this knowledge was acquired. Democracy versus corporatism. Labor versus capital. Utilitarianism versus libertarianism.

To avoid accepting and learning these lessons, Europe endures ever more pain and suffering, and this European ignorance is deliberately cultivated so a very small elite minority maintains power via a corporatist structure. So as to not be "American", Europe has every 30 to 70 years visits upon itself carnage of incredible ferocity yet, in comparison, the USA required only one Civil War to arrive at settling on the truth and the best governance possible that avoids constant carnage. Jefferson's Pol Pot/Maoist like thought that the tree of liberty needed to be constantly watered by blood never took hold in the USA - though most would of course say the Civil war was enough blood for a millennium of irrigation.

Europe carries on and on with blood watering almost constantly, given their terrible disease of commitment to special interest corporatism, for the sake of these strongly embedded and tradition based organized blocks of special interest a fanatical subtle dedication to maintain this system continues, a system which is basically a complex net of guilds developed in the Middle Ages -Europe has constantly sacrifice millions and millions and millions of souls so as to avoid the basic enlightened principles proven true over 200 years ago for they would end corporatism. The core and true governance of Europe is applied always so these long bastions of power, these corporatists blocks, are maintained. The blocks are clocked and hidden under the claim to the primary importance of "culture" and that they really do not even exist.

A major point of enlightenment was when I came across Keynes phrase used in 1919 peace talks describing WW I as "the European civil war". His criticism of the resulting Versailles Treaty was that of a person considering a whole "United States of Europe".

I thought it would be useful to reread the Gettysburg Address not in context of the USA, but in context of Europe - that no one in Europe has reached a "Lincoln Moment" of reflection and redemption and progress (or of greatness) that generated a Gettysburg Address. But there is hope if Lincoln is correct in claiming these truths are universal and "self evident". That means one day, one year, one century - Europe will adopt universal truth so as to avoid great evil.

That hope is firmly part of the the great root that Lincoln stated as the "last best hope of Earth" which is not that the USA will dominate or have empire, but that the ideals of the USA were worthy of the slaughter of the Civil War given that they were universal truths, first brought in front of the public eye in the Declaration. Lincoln said on the Declaration: "something in that Declaration giving liberty, not alone to the people of this country, but hope to the world for all future time". If Europe wishes to grant their people more perfect union and "hope", they must surrender their subtle elitist and but powerful corporatism system which is extra-democratic governance and accept these universals truths. They should not be repelled that the source seems to be from the USA, for the source that the USA applied and then modified and tested was, of course, from Europe. rather that anit-american disdain is a ruse by the groups in power to maintain power for corporatism cannot survive as the dominate power in a Lincoln democracy.

Merkel, and all leaders of Europe should for the sake of their People accept and apply these hard learned universal truths versus the steadfast European rejection of the last 200 years. There is hope in this crisis as it is not like the previous ones for the current crisis can be seen not as a challenge to these universal truths, but rather that the current EZ and the EU being basically a design brought to Europe by the USA post WW II, is undergoing a "counter-coup" by the still deeply entrenched European corporatists - only this crisis, instead of manifesting in the form of fascism or Marxism or monarchism - all corporatists at heart, is a more clever subtle anti-democratic Habermasian perpetual complex dialogue of technocratic elite which maintains it is a refinement of the universal truths of Lincoln. But it is not, it is still corporatism the likes of Lorenzo Medici would understand and likely actually compliment as being especially insidious and effective.

Europe should ponder the below not in terms of American hegemony objectives, but in terms of asking why is it the USA required only one Civil War in the last 200 years while Europe is now approaching their sixth civil war. Why is it the USA only required one lesson of slaughter of their own people, with about 700,000 casualties of wounded and dead from the Civil War while Europe, in the same time of 200 years, has suffered well over 200,000,000 in casualties of wounded and dead? The price the European corporatists are willing to spend in terms of blood is staggering - beyond the most rapacious thoughts of a Caligula or an Attila.

To not read deeply the below, and to go on and implement the universal values and truths in Europe the below so succinctly declares, is indicative of an incredible evil and dark side to the European psyche. Europe should face that they are not dealing with a sovereign debt crisis now, which once solved with technical devices, Europe can then return to the so called European "third way"and thereby maintain the corporatism governance, but that Europe is once more, by attempting to maintain a unique political philosophy of corporatists governance, will lead to great suffering and blood once again.

Europe must surrender corporatism and the belief that only the few can lead - they must trust and give power to the 'People", not in terms of populism cant but in terms of ' We the People". The current system is an evil - perhaps the most evil in history. The fact it is masked and hidden under decades of refined civilized discourse and "culture" perhaps makes it the most insidious and deadly evil in history of man. There - how about that? Prove me wrong.

"Four score and seven years ago our fathers brought forth on this continent, a new nation, conceived in Liberty, and dedicated to the proposition that all men are created equal.

Now we are engaged in a great civil war, testing whether that nation, or any nation so conceived and so dedicated, can long endure. We are met on a great battle-field of that war. We have come to dedicate a portion of that field, as a final resting place for those who here gave their lives that that nation might live. It is altogether fitting and proper that we should do this.

But, in a larger sense, we can not dedicate -- we can not consecrate -- we can not hallow -- this ground. The brave men, living and dead, who struggled here, have consecrated it, far above our poor power to add or detract. The world will little note, nor long remember what we say here, but it can never forget what they did here. It is for us the living, rather, to be dedicated here to the unfinished work which they who fought here have thus far so nobly advanced. It is rather for us to be here dedicated to the great task remaining before us -- that from these honored dead we take increased devotion to that cause for which they gave the last full measure of devotion -- that we here highly resolve that these dead shall not have died in vain -- that this nation, under God, shall have a new birth of freedom -- and that government of the people, by the people, for the people, shall not perish from the earth."

This is most serious considering that highly engineered exports are the heart of the German economy. What is strange is that most pundits are using descriptors like “soft patch” or “slowdown” , though I suspect this is the beginning of a calamity.

Germany is the cause of the EZ debt crisis as their intra-EZ anticompetitive policy (wage pact and subsidized industry in zaibatsu like structures) has established a significant intra-EZ trade imbalance in Germany’s favor which is mercantilist in characteristics. Germany has made the PIIGS their effective economic colonies. Imbalances imposed, especially to the weaker and smaller PIIGS, are not able (nay, allowed) to be corrected but for severe unemployment adjustments and austerity. Being basically a mercantilist construct, these imbalance adjustments in the end eliminates the export markets required by the German economic model. Therefore in lock step with the grief being felt by the PIIGS, as priced in sovereign debt and rising unemployment levels, the German economy is imploding.

Therefore the words “slowdown” and “soft patch” are optimistic and pan gloss as the common sense of trade accounting identities will show, the problems in the PIIGS will be visited upon the Germans. In short Germans are likely to enter a depression if austerity and unemployment is felt to be the only remedy available for the EZ – as Merkel, and to a lesser degree, Sarkozy are insisting upon.

If the “grand strategy” objective of the EU and EZ is to provide repair and then stability for the European economy post WW II and to subsume Germany to a greater sovereign egalitarian Europe – the risk of that “grand strategy” failing spectacularly is now high.

The EZ debt crisis remains endemic and chronic to where the point I made earlier about the frog’s willingness to stay in a pan of water over the stove burner as long as the water is only incrementally increased could not be more apt. The EZ frog’s water is about to hit boiling.

2. Yet the USA has decoupled from the EZ crisis so that tactically there is little if any risk of contagion from the EZ crisis or outcome to the USA economy. The Federal Reserve has done a magnificent job in providing this defense through a massive link of central bank cooperation, principally through reinstating and then activating the foreign exchange and foreign central bank swap lines as were utilized in the 2009 crisis. This time the swap lines are now aligned with significant resources from all non-EZ area central banks such as Japan, Canada and Switzerland. Private sector US financials have fairly well made themselves immune to EZ contagion from reduced exposure if not total elimination of any EZ area assets in money market funds to lending and securities and derivative holdings with EZ explicit or implicit exposure. Total immunization is not possible, of course, but given the Federal Reserve actions taken above there should be minimal impact from any EZ problems. I do not think there is systemic financial risk for the USA from Europe.

Furthermore the USA is entering a robust resumption of trend economic growth that is likely now exceeding potential. Unemployment has been showing this turn since early summer 2010 in the household survey data which leads establishment survey data at this point in the US economic cycle. The administration is righteously stating 1.9 MM jobs were created in 2010, which was not noticed by most Street folks and professional economists as it was masked in the headline number with returning job seekers to the labor pool – this is why the headline number stands at “only” 8.5% while the 1.9 MM is about 1 ½% improvement on a gross basis (meaning the unemployment rate if the labor pool stayed unchanged would have a 7% handle now). I didn’t realize we were in a full recovery until October. This likely assures the Obama re-election. Various financial markets in the US are starting to leave their obsession with the EZ crisis and as the markets come to understand the US recovery and economic vigor and the bulwark of defense, they are starting and will price in a general recovery and then trend growth. Nominal pricing of USA risk free bonds will take a tumble but “real” pricing will likely maintain stability given the actions taken by the Federal Reserve and equity markets should have large returns for 2011. This may cause problems in the hedge fund and risks taking financial communities as most are positioned for the opposite outcome. I do not think even the more astute hedge funds and risk managers understand the scaling and size of the USA in relationship to the rest of the world and they do not understand the efficacy of the Federal Reserve.

The above is becoming a very bullish environment for the USA current political and financial markets and returning the USA to a normalized economy without subsidizing or expending political capital on the EZ crisis. But I am afraid that the current more positive USA economy and environment is actually allowing a dangerous “America First” like mentality, a dangerous withdrawal from the European political sphere at a critical time.

It seems support for the technocratic “muddle through” approach to the EZ crisis is the adopted US policy and given the above results in the USA – it would seem to be the right approach, especially for your Client. And with only a one horizon to the election that may in fact be the optimal approach in terms of political expediency. But I suspect it will be in the end leading to a disaster and possibly a costly error, not in terms of financial markets or the economy but in terms of providing cost efficient security for the US.

3. The recently announced RIF, approaching 500 billion reduction, is a most serious “new” factor for the above points. The market has not even begun to appreciate the positive impact of the RIF. The last time we had a strategic RIF, the period from post Desert Storm 1992 to 2001, the US went from a chronic deficit posture to where we had a surpluses and even were then discussing the dangers of not having enough US Treasury debt. The US “long bond” was eliminated (since reinstated of course) and real yields were at record lows. There was a lot of flash and hype on the internet but the stock markets and basically all financial markets enjoyed a strong bull market from 1994 to 2001. The internet “bubble” was an overextension of this bull market, but the very presence of Google and the likes today show it was not a bubble in reality. To my view the main change post 2001 was reversing the RIF and going to a war footing post 9/11, not the internet bubble crash. Now we are returning to RIF and as it was in the beginning of the Bosnia conflict (remember Rebecca West’s “Black Lamb and Grey Falcon” fears on how Yugoslavia tied down 40 German divisions in WW II?) there is skepticism that the USA can still present security and implement a RIF. Of course I do not have to recite why I think the USA can implement RIF to you, but there is one difference that does challenge the ability of the USA to implement a RIF versus the 1990s.

4. Since the USA is avoiding any persuasion to the EZ but for current efforts and that the USA indicates it will not take actions beyond supporting “muddle through”, and given that the EZ leadership are showing a complete inability to leave parochial politics and provide a suitable remedy to the crisis for all EZ people, then the EZ will likely crash. It seems the administration is gambling that the EZ crashes after the election and not before.

5. When the EZ crashes it will enter a long and bitter reconstruction phase which will mean the sole available remedy, a federation of the EZ sovereign states to one sovereign entity, will be a long time in the coming post-crash. In this eventuality, the US will find it impossible to implement the planned RIF if any reasonable security is expected.

Only a federal EZ can ever provide either a suitable hard power ally of the USA or that would allow a setting for US hard power projection. The “pity” is that hindsight will likely conclude that the long torturous route post-crash to reach the necessary federal Europe could be achieved in principle in one weekend now if the USA would expend political capital and insist upon this outcome.

6. The EZ crisis was always, given the history of the EZ and the motive for its creation sponsored and encouraged and even “permissioned” by the USA, about security. The EZ was always about security for Europeans and security for the USA. Therefore it is the security of the USA at stake in the EZ crisis, not financial or economic considerations. The only way to approach the EZ crisis and reach prescience and also to design a robust solution that is in accord with US values is to approach the EZ crisis as a constitutional crisis.

“We are led, by events and common sense, to one conclusion: The survival of liberty in our land increasingly depends on the success of liberty in other lands. The best hope for peace in our world is the expansion of freedom in all the world. “

While most are using the “Bush Doctrine” in reference to the current event s in the Arab world and North Africa, I think the most important implications of those words in terms of security for the USA is now to be found in Europe, specifically the current tolerance the USA shows for the undemocratic authoritarian technocratic “muddle through” policy now being applied to Europe is not aligned with US values. While the USA pursuing of a “Bush Doctrine” for Europe may not be feasible at this point from any short term consideration for political reality, plans should be made now for a most intense diplomatic and even covert campaign to prompt the EZ to form a democratic federal union and not permit the current technocratic confederation or the authoritarian plutocracy Europe seems headed towards. There are excellent chances that the EZ crashes before November 2012, but with some luck it does not and then after the election the USA can then turn and prompt the EZ towards federal Union – it will not happen any other way. It is clear to me that only the USA can evoke a democratic federal EZ being formed. Be best if it were now, but it seems that is not to be.

With luck the EZ will not blow prior to the election. But I think it is very likely that the first two quarters 2012 will be dramatically fast paced as US withdrawal from the EZ becomes understood and Europeans will take defensive actions, civil disobedience will rise, likely exponentially, and extreme financial stress that would take a weekend now to remedy will take decades to mend. As is now it is difficult for the US to implement the RIF and to look to Europe as a reasonable partner in international security. Where EZ is headed and if it enters a catastrophe the US will find it impossible to implement a RIF and in fact will likely have to greatly increase security expenditure in Europe.

It should be noted the situation in Hungary and the Ukraine and the inability for the EU to provide suasion or an answer or apply leverage. They are powerless. To my mind both the situation in Hungary and that in the Ukraine are like developments from the press of the 1920s.

I wonder if the USA has made Europe aware of what form the EZ should be in that would be most welcome to the USA. Has that been unambiguously relayed to the Europeans? Is there a form the EZ should take that is agreed to be optimal by US policy makers? To date all I have read is the USA mentioning rather technical details about TARP like financing and the EZ crisis should be solved and so on and so forth – basically trivialities and details - but without the USA giving any mention as to what form or shape the EZ might change towards or should seek. Is the USA comfortable with the unelected technical rule of Italy? Or the technical rule for Greece? Why is Sec Geithner leading this dialogue and not Sec Clinton if the EZ is in fact a national security issue? To my mind and given the above points, if valid, this use of Treasury versus State and your Agency might indicate the administration does not understand the nature of the problem. If the EZ crashes before the election, more will start to ask this question as the consequences for US security become clear and as the US shows it is basically free from financial contagion. “Where was Sec Clinton prior to the crash?”, will be asked. “Why did the US allow this?” , will be asked.

Everything I read and observe leads me to believe the current time is very similar to that prior to WW I – a most dangerous era indeed. Europe is returning to dominate our security concerns, I am afraid.

The two most dangerous errors that I see being made now by our government and also by the majority of the world leadership and intelligentsia are first with the declinism thesis applied to the USA and second the belief that general war and the general deployment of “great power” hard power in symmetrical conflict is something that will never occur again. (Of course the belief that hard power is no longer a factor suits nicely the US declinism thesis.)

And the reality is that no time in the last century has ever been more like the time immediately prior to WW I – it is not identical of course but it resonates with many rhymes. This is why Europe counts and should take center stage, until the EZ crisis is ended, for USA national security strategic formulation.

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About Me

Many years of experience in being a market maker, a trader, a salesguy or portfolio manager in almost all asset classes known. Have had a high teens average career return and yet can say that I have lost more money in more asset classes than anyone I know.
My biggest curse is that not even wishing to become involved: "I see dead people.", as the kid said in the movie. I can smell a trade in the drawer or financial fraud or PL blowup miles away. Should have been with the FBI if wanted to max social utility.
Autodidact in all things math, formal education in history.